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5. TPR Co., Ltd. Business Report FY ended Mar. 2016

TPR Co., Ltd. Business Report FY ended Mar. 2016

*1：Includes business activities by the Company’s European and South American local corporations.

Recent business developments

Production

• Brazil: Cylinder-liner plant started delivering products
• Vietnam: Increased the types of products being manufactured and improved logistics in the ASEAN Region.
• Indonesia: Launched production of automotive door glass parts, i.e., engineering plastic.

Initiatives for diversification

• FOMM decided to use the Company’s aluminum brake-drum-insert for its electric vehicle.
• An open-cell porous-carbon was developed by the Company’s subsidiary, TPR Industries Co., Ltd., in collaboration with Tohoku University’s Institute for Materials.
• Electric business launched sales of capacitors.
  
  -TOC Capacitor Co., Ltd. began delivering an electric double layer capacitor (EDLC) in December 2015. The EDLC activities were transferred from Nisshinbo Holdings in November 2014. The capacitor that EDLC began delivering is for energy recovery on hybrid excavators. The Company plans to expand the product lineup of this capacitor, as well as improve its performance.
  
  
• The Company is further increasing the production capacity as well as expanding the diversity of existing business operations in China.

Business Outside Japan

-With the increased use of aluminum parts for automotive engines in the U.S., the Company will strengthen sales operations for its cylinder liners for local automakers. The Company wants to get orders for new models by highlighting the high reliability of its cylinder liners, which utilize distinctive casting techniques. The Company will adjust production flexibly at its two manufacturing plants in the north and south of the U.S., with the goal of receiving new orders for several hundred thousand cylinder liners per month by fiscal year 2017. (From an article in the Nikkan Jidosha Shimbun on February 8, 2016)


-The Company will expand its automotive engine parts business in Southeast Asia. The Company intends to raise the ratio of automotive engine parts sales to total engine parts sales in Southeast Asia, which currently stands at between 30 and 40%, to 50% or higher over the mid-term. The Company has not set its deadline in consideration of output fluctuation of the automakers, but aims to raise the ratio to 50% or above by the fiscal year ending March 2021. This move is in response to the output increase by Japanese automakers in the region. The Company plans to win new orders taking advantage of its competitiveness gained in China, where the Company holds the largest market share for piston rings and cylinder liners. (From an article in the Nikkan Jidosha Shimbun on March 14, 2015)

Cost-cutting initiative
-Faltec Co., Ltd. has launched a major cost-cutting initiative in Japan by utilizing a method developed by TPR Co., Ltd., its parent company. The company will cut headcounts and reduce process defect rates at its domestic plants in such a way that their cost-efficiency levels will become equivalent to those in low-cost countries. Faltec has already pursued a cost-reduction initiative in accordance with its plan to reduce both production space and lead time by 50%. As the next step, the company will drastically improve each production process at its all domestic plants, intending to introduce the new, efficient production lines to its future global operations. (From an article in the Nikkan Jidosha Shimbun on May 11, 2015)

Contracts

-The Company has received a contract to supply piston rings to Mazda Motor Corporation for the first time in about ten years. The piston rings will be used on Mazda's Skyactiv engines, which TPR already supplies cylinder liners for. In addition, the Company's valve seats have been chosen for installation on the automaker's flexible fuel vehicles. In October 2015, the Company opened a new office in Hiroshima City, where Mazda's headquarters is located. It aims to strengthen support for and build a closer relationship with the automaker. (From an article in the Nikkan Jidosha Shimbun on January 25, 2016)

>>>Financial Forecast for the Next Fiscal Year (Sales, Operating Income etc.)

Mid-term Management Plan

-In 2015, the Company announced its mid-term management plan that starts from the fiscal year ending in March 2016 and ends in the fiscal year ending in March 2018. Sales targets are provided below.

• Consolidated sales: JPY 193,300 million (TPR's amount: JPY 105,000 million; Faltec's amount: JPY 88,300 million)
• Operating income: JPY 26,000 million (TPR's amount: JPY 20,400 million: Faltec's amount: JPY 5,600 million)

-In the Company's operations mainly involving metal products, the Company will accelerate sales of automobile parts in North America and emerging countries under the slogan of "Innovation and Expansion." In addition to engine-related parts, the Company will launch new brake drums and new high-performance capacitors, which are made with aluminum and a casting material for weight reduction. During the period of the new medium-term business plan, the Company will aim to gain a foothold with new products toward the next medium-term business plan. The Company will also target to improve profitability in Faltec operations primarily involving plastic parts in an effort to increase the consolidated operating profit. (From an article in the Nikkan Jidosha Shimbun on June 13, 2015)

-The Company plans to expand the production of components other than piston rings and cylinder liners, which are its major products. The Company has already won new contracts for carbon scraper rings, rubber and plastic sealing for powertrain components, and metal parts used in exhaust gas recirculation (EGR) systems and superchargers. Revenues from the sale of these products are expected to reach approximately JPY 3 billion by FY 2020 that ends in March 2021. A carbon scraper ring is a cylindrical component that is inserted into the upper part of a cylinder liner. It scrapes off the hard carbon deposit from the piston. This prevents the wearing of the inner cylinder, while lowering the consumption of lubricating oil. The product is already used on vehicles from European and U.S. automakers, and its annual production volume is forecast to increase to 2 million units by FY 2020. Rubber and plastic sealing for powertrain components is specifically targeted at Chinese automakers. The Company believes these products will become a strong growth area, as Chinese companies develop and produce higher-performance vehicles. The Company will promote sales of these products by leveraging its extensive sales network and a significant share in the Chinese engine parts market. As for EGR and supercharger components, the Company is currently developing new products for Japanese automakers' diesel engine models by applying its expertise in casting. These components are expected to be put on the market within the next two or three years. (From an article in the Nikkan Jidosha Shimbun on February 20, 2015)

Long-term Perspective

-The Company has set the following financial targets for the fiscal year that ends in March 2021, in commemoration of its 100^th anniversary in business.

• Consolidated sales: JPY 220,000 million
• Net profit of parent company: JPY 20,000 million

Awards

-Major awards received in FY ended Mar. 31, 2016 are as follows:

Major R&D Facilities

-R&D activities are conducted at the Technical Centers located within the Nagano Plant and in the Okaya-City, Nagano Pref. Japan.

R&D Activities

-The Company worked on developing new products from a variety of aspects. These included lower friction, heat control, lighter weight, cleaner exhaust gas emissions, and alternate fuels (bio-fuels, CNG).

-The Company, in working to make products that have even greater levels of precision, developed new production methods that automate inline measuring, radically reduce costs, and minimize energy used in production operations.

-The Company is migrating its new technologies to business operations outside Japan, working to achieve the world’s highest level of identical quality by partnering with companies outside Japan, and conducting PR activities promoting new products and technology to customers outside Japan.

-In order to quickly respond to the needs arising in line with the growth of electric vehicles, the Company is strengthening its capabilities in non-powertrain products. As a result, the Company focused its energy in introducing new technology in seals that mainly include rubber and composite products made lighter in weight by the use of aluminum and plastics. In this regards, the Company is building its R&D framework to create functional, cost-competitive products ahead of its customers, while exploring new business sectors.

R&D Achievements

1) Piston rings
-Development of super low friction rings and low LOC (lubricating oil consumption) rings which are designed to improve fuel economy.
-Development of highly-functional oil rings, which are designed to improve reliability.
-Creation of a production line that is designed to radically reduce the production costs of piston rings.

2) Cylinder liners
-Commercialization of liners for small engines. These liners are smaller in diameter, have super thin walls, are lightweight, and have superior heat-conducting properties, enabling them to respond to the needs for greater output and improved fuel consumption and reliability.
-Commercialization of low friction heat control liners.
-Commercialization of cylinder liners which have high mechanical strength.

3) Valve seats, valve guides
-Commercialization of valve seat materials which are capable of responding to the need for alternative fuels. These materials are highly resistant to abrasion.
-Development of a new production line with innovative features that remarkably lower costs, enabling the production of low-priced products.
-Commercialization of sintered valve guides.


1) Aluminum-based products
-Commercialized an aluminum wheel for 4 wheel vehicles for aftermarket by creating a new casting method and installing equipment.
-Commercialized an aluminum brake drum by applying a centrifugally casted spiny shaped FC material.

2) Sintered mechanical parts
-Create innovative cost-cutting methods to develop sintered mechanical parts for small sized seal-ring for turbochargers, to respond to low-cost needs.

3) Plastic and rubber products
-Commercialized plastic seal-rings for transmissions.
-Created greater precision electromagnetic valve spool rubber seals.

Product Development

Steel seal rings for superchargers
-The Company will supply its newly-developed steel seal rings for superchargers to IHI Corporation from the summer of 2016. The Company will market the steel seal rings as being able to stand up to extreme usage conditions by highlighting attributes like its superior heat resistance compared to sintered rings. The Company aims to double the sales of seal rings for superchargers in 2020 by supplying IHI, and also by winning new orders from Mitsubishi Heavy Industries, who it supplies sintered rings, and Europe- and US-based supercharger makers. (From an article in the Nikkan Jidosha Shimbun on February 17, 2016)

-During FY ended Mar. 2016, the Company made continued investments in its operations overseas, spending to revamp and improve production facilities so as to increase production capacities.

-The Company plans to spend JPY 13.6 billion for capital investments in the fiscal year ending in March 2017. The breakdown follows.

• To add facilities in order to increase production in China and Vietnam.
• Development investment (as seeds for the future) and streamlining investment
• To consider M&A activities.